NEW YORK, June 7 (Reuters Breakingviews) – “Do as I say, not as I do” sounds like the kind of pithy thing Warren Buffett might say to his adoring throngs. Although the nonagenarian billionaire can’t lay claim to the aphorism, it’s one worth heeding when trying to understand or emulate his investment philosophy. There’s often a discrepancy between what he says and what he does.
The Berkshire Hathaway (BRKa.N) boss told his shareholders in a 1988 missive that “our favorite holding period is forever.” The idea of Buffett as a long-term investor has stuck through the ages. Somewhat lost to history is that the oft-quoted line included a reference to “outstanding businesses with outstanding managements.” It also specifically cited big purchases that year of Coca-Cola (COKE.O) and Federal Home Loan Mortgage, or Freddie Mac, securities he said Berkshire intended to own for a long time.
Buffett was true to his word. Freddie Mac, the U.S. government-backed home mortgage lender, eventually would swell to become 10% of Berkshire’s equity portfolio. The conglomerate was an investor for a dozen years, until Buffett got spooked by Freddie Mac’s overly rosy earnings growth projections. And 35 years later, Berkshire still owns Coca-Cola. The $1.3 billion stake it finished accumulating in 1994 was worth $25 billion last month. In his most recent investor letter, Buffett touted how the $75 million in cash dividends Berkshire collected that year from Coke had bubbled beyond $700 million in 2022.
This sort of endurance has become part of the Buffett myth, alongside his habit of rummaging for companies that trade at less than their intrinsic value. It’s true that Berkshire rarely sells a business it has bought in its entirety. Although it offloaded an insurance underwriter a few years ago and more recently exited the newspaper business, there are many more examples of sticking with purchases such as Benjamin Moore paints, the BNSF railway operator, Fruit of the Loom underwear and See’s Candies.
When it comes to publicly traded equities, however, Freddie Mac and Coca-Cola are the anomalies. More typical is Buffett’s about-face on Taiwan Semiconductor Manufacturing (2330.TW), or TSMC. Berkshire disclosed a $4 billion stake in November, only to dump it months later after re-evaluating the geopolitical risks facing the $460 billion chipmaker’s home base. The decision might have shocked investors who had pushed TSMC shares up 4% after Buffett first said he bought the stock.
The TSMC episode also served as an insight into how Buffett watchers rationalize his moves to avoid disturbing their perceptions of the “forever” doctrine. “With Berkshire tending to be a buy-and-hold for a very long-time investor, he just felt more comfortable with the capital they’ve been investing in Japan than continuing to invest in Taiwan, especially with most of those purchases funded with Japanese yen-denominated debt,” Morningstar analysts explained to clients.
In truth, Buffett is more like a typical, albeit ultra-rich, American shareholder. Understanding this phenomenon is important given that Berkshire’s equities portfolio amounted to about $325 billion on May 15, with another $125 billion or so in cash and U.S. Treasury bills as of March 31, for a company with a $725 billion market value.
Buffett buys and sells multi-billion-dollar slugs of stock, not necessarily on a whim but certainly with great regularity. In a 2010 study of how markets react to Berkshire’s trades, researchers found that of the 230 different stocks the company owned between 1980 and 2006, it held 60% of them for less than a year, or considerably less than forever. It kept just nine of them for at least a decade.
Small investors, too, have shrunk the length of time they hold shares over the decades. The golden age was the 1950s, when average retention peaked at roughly eight years. It tumbled to less than six months in June 2020, according to calculations a few years ago by Reuters using New York Stock Exchange data.
The chunkiest bits of Berkshire’s portfolio today are noticeably different from a decade ago. Coca-Cola and American Express (AXP.N) have been mainstays, but another large and longtime holding, U.S. lender Wells Fargo (WFC.N), is gone. A $13 billion stake in IBM (IBM.N) came and went, as did $8 billion of JPMorgan (JPM.N) and almost $3 billion of biopharmaceutical company AbbVie (ABBV.N). Video-game developer Activision Blizzard (ATVI.O), oil producer Occidental Petroleum (OXY.N) and media conglomerate Paramount Global (PARA.O) are among the many newer investments, as is Apple (AAPL.O). Buffett did not back the iPhone maker until 2015, some 35 years after its initial public offering. The position has quickly swelled to $150 billion and accounted for nearly half of Berkshire’s equity holdings in mid-May.
There’s no shame in regularly reevaluating one’s investments. It’s actually a virtue, since stubborn fealty can be costly. In addition, companies get acquired or go bust, forcing fresh capital allocation decisions even for those, like Berkshire, that eye distant horizons. Moving in and out of stocks has worked for Buffett, even though, like many inferior investors, he has come to regret some of his hastier trades. Selling a McDonald’s (MCD.N) stake too quickly in 1998 was “a very big mistake,” Buffett conceded not long after doing so.
He isn’t known as the Oracle of Omaha for nothing, however. From 1965 through 2022, Berkshire’s 20% annual compounded gain was twice that of the S&P 500 Index (.SPX), including reinvested dividends.
Nearly 30 years after espousing his “forever” preference, Buffett tried to clarify his thinking on holding periods in 2016 by adding a line to one of Berkshire’s “business principles” to emphasize that the word applies only to controlled businesses. Even then, however, he nurtured the idea that the intent with stocks is for always. Each of his marketable securities is available for sale, he said, “however unlikely such a sale now seems.”
Based on Berkshire’s extensive track record, a sale really isn’t unlikely at all. As far as stock investing goes, it’s better to do what Buffett does than what he says.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add dropped word in final paragraph.)
Berkshire Hathaway sold its remaining stake in contract chipmaker Taiwan Semiconductor Manufacturing, the investment conglomerate disclosed in a regulatory filing on May 15.
Warren Buffett, Berkshire’s chairman and CEO, said that geopolitical tensions contributed to the decision to sell most of the $4.1 billion TSMC stake just a few months after buying it, the Nikkei reported on April 11. China identifies Taiwan as its territory, a claim the democratically governed island rejects.
Editing by John Foley and Sharon Lam
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